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SCALING LEAN Mastering the Key Metrics for Startup Growth
Portfolio / Penguin
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PORTFOLIO / PENGUIN An imprint of Penguin Random House LLC 375 Hudson Street New York, New York 10014 penguin.com
Copyright © 2016 by Ash Maurya Penguin supports copyright. Copyright fuels creativity, encourages diverse voices, promotes free speech, and creates a vibrant culture. Th ank you for buying an authorized edition of this book and for complying with copyright laws by not reproducing, scanning, or distributing any part of it in any form without permission. You are supporting writers and allowing Penguin to continue to publish books for every reader.
ISBN 9781101980521 (hardcover)\ ISBN 9781101980538 (ebook)
Printed in the United States of America 10 9 8 7 6 5 4 3 2 1
Set in Kepler Std Light with Geometric Designed by Daniel Lagin
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Introduction: Another Book About Startup Growth? 1
PART 1 DEFINING PROGRESS
CHAPTER 1 21 Traction Is the Goal
CHAPTER 2 49 The Back-of-the-Envelope Business Model Test
CHAPTER 3 73 Build a Traction Model
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PART 2 PRIORITIZING WASTE
CHAPTER 4 105 The Customer Factory Blueprint
CHAPTER 5 129 Benchmark Your Customer Factory
CHAPTER 6 142 Finding Constraints
PART 3 ACHIEVING BREAKTHROUGH
CHAPTER 7 163 The Art of the Scientist
CHAPTER 8 189 Seven Habits for Highly Effective Experiments
CHAPTER 9 214 Dealing with Failure
CHAPTER 10 228 Avoid the Curse of Specialization
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CHAPTER 11 258 Hold Yourself Accountable
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Another Book About Startup Growth?
ANOTHER BOOK ABOUT STARTUP GROWTH METRICS? WHY ADD TO AN already crowded shelf?I have had the entrepreneurial bug my whole life. I came to the United States on a student visa which restricted me from starting a company. So I did the next best thing. I joined a telecom startup shortly after graduating from university. After a few false product starts, that startup eventually found product/market fi t with a voice-over-IP softswitch product, which led to a successful exit in 2002. Th at is when I left to launch my fi rst startup, WiredReach. Like the earlier startup, Wired- Reach began with a few false starts until I found product/market fi t with a fi le- sharing product targeted at small businesses. I subsequently sold that business in 2010 to start my latest venture, LeanStack. Our mission is helping entrepreneurs everywhere succeed.
My fi rst book, Running Lean, grew out of the fi rst set of challenges I experienced as a startup founder: the need to quickly iterate from an early-stage idea (or plan A) into a plan that works. I had built many products over the years, and while they all started out equally exciting, not all of them stood the test of the market. I realized that I had many more ideas than I had time or resources to test them. More impor- tant, I didn’t have a repeatable process for doing so.
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2 SC ALING LE AN
Th is prompted my search for the repeatable metapro- cess I describe in Running Lean. It was derived from rigor- ous testing and fi rsthand experiential learning by building
many of my own products and by working alongside hundreds of other entrepre- neurs spread across the globe in domains ranging from software to hardware and high-tech to no-tech businesses.
Th e big epiphany for me while writing and researching Running Lean was that the true product of a successful entrepreneur is not just a great solution or an inno- vative piece of technology, but a repeatable process that connects your solution with paying customers—in other words, fi nding a working business model.
But it turns out that’s not enough. Running Lean, though it delivered on its promise, described only the fi rst step in a two-step process on the path to building a successful startup. Over time I found that when the time came to scale up my products and teams, my most rigorously tested business models faced a whole new set of challenges. I learned fi rsthand that seemingly watertight business models can disintegrate under the pressures of expanding into new markets and managing stakeholder expectations.
I went searching for a solution.
Scale Starts with Metrics
Building a scalable and successful business starts with knowing what to measure and how.
Th e fi rst and most important stakeholder in the business is you, and your scarc- est resource is time. Every minute spent on a business that is doomed to fail is a waste, and so it’s critical for you to be able to identify—quickly, early, and accurately— whether a business idea is worth pursuing.
What’s more, you’re going to be called on to demonstrate progress to external shareholders. From the earliest days of a startup’s life, you as a founder have to jus-
Life’s too short to build something nobody wants.
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ANOTHER BOOK ABOUT STARTUP GROW TH? 3
tify your new venture’s “potential for progress” to a VC, CFO, spouse, or even yourself as a prerequisite to securing runway.
Early-stage startups typically rely on two measures of progress: how much stuff they are building and how much money they are making. Yet unfortunately, both of these metrics are unreliable proxies of progress that can lead you down the wrong path—building something nobody wants.
Traditional accounting metrics, like revenue, profi t, and return on investment (ROI), aren’t helpful at the early stages because they all track numbers that are neg- ative or near zero. Even at later stages, relying solely on aggregate revenue can pre- vent you from uncovering the right growth strategies.
When my businesses were at this stage, I found myself wanting to collect and analyze as much data as possible. But in a world where we can measure almost anything, it’s easy to drown in a sea of nonactionable data. I learned how to keep from drowning—and how to navigate the unfamiliar terrain that comes after Run- ning Lean.
The Wrong Way to Do It
Take a typical startup founder—let’s call him Bob. He has a great idea for a business. Th is is the “honeymoon period” of his venture when anything seems possible. Bob believes it would be more eff ective to fi rst build out his solution and make it easier for others to see his vision. Halfway through, he realizes that he underestimated the scope of his solu- tion and decides he needs to secure additional resources to continue.
Bob spends the next several weeks writing a sixty-page business plan. He knows that the trick is starting with the right “exit number” and then working backward.
You are the fi rst investor in your business idea. You invest with time, which is more valuable than money.
This book will teach you the metrics that defi ne a working business model. Armed with these metrics, you can justify the investment of your time and communicate progress with your internal and external stakeholders—without drowning in a sea of numbers.
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4 SC ALING LE AN
Th e right exit number represents the return on investment he needs to promise his investors. Th is number needs to be big enough to whet their appetite, but also within the realm of believability to maximize his odds of getting funded. Th ere is a run- ning joke in business schools that the best spreadsheets get funded. So Bob labors endlessly on his forecasts, often made up of hundreds of numbers. Th en he hits the pitching circuit to raise funding for his idea.
After several additional months of pitching and lots of rejection, he manages to raise just enough seed capital to move forward.
Bob hires a team and spends the next several months tracking progress against the execution of his plan. Because revenue is nonexistent during this phase of the venture, Bob settles for measuring progress by ensuring that his team is building their product on schedule and within budget.
Fast-forward a year. Bob’s team has been very busy and managed to launch their product to market. But while they have some revenue to show, they have missed their projected targets—by a lot. Under pressure to demonstrate more promising revenue numbers to his stakeholders, Bob resorts to a number of short-term account- ing tactics and product stra